What is Staking?
Holders of cryptocurrency and other digital assets are interested in profiting from their holdings without having to sell outright. That’s where staking comes in. Staking allows holders to earn a passive income off their digital assets.
Whether you are interested in staking your crypto assets yourself, or are simply looking to learn more about the decentralized finance (DeFi) space, this post will provide you with a basic overview of everything you need to know about staking.
What is Staking?
Staking is the process by which token holders put their digital assets to work while earning passive income. It enables token holders to utilize their assets without selling them. Staking is similar to owning a savings account with a traditional bank. The bank pays you interest because conventional banks use your money for things like loans and other investments. In a similar way, staking allows you to put your tokens to work.
Staking is only possible on blockchains that utilize proof of stake (PoS) as opposed to proof of work (PoW), as a method for validating new blocks. But more and more blockchains are opting for the PoS approach, because of environmental and economic concerns about the energy required for PoW. Ethereum, in particular, is expected to move to a fully PoS model sometime in the summer of 2022, in what is known as “the merge.”
In a PoS blockchain, a user's number of tokens staked is used to validate transactions. Users have a better chance of being selected to validate transactions on the network and earn a reward if they stake more tokens.
Depending on the protocol, there are some differences in how proof of stake systems work. Still, in general, the algorithm chooses blocks at random and sends them to a validator node for evaluation. The validator then verifies the validity of the transactions. If everything is correct, the validator enters the block into the ledger, once this process is completed correctly the validator earns the block rewards. A validator's staked holdings will be penalized if it adds a block with incorrect data.
Why should you stake?
There are three primary reasons you should stake tokens that you are not currently trading.
1. Passive Income
By staking tokens that are not actively being traded, you earn passive income through an annual percentage yield or various rewards depending on the protocol you stake your tokens with, so as a token holder, you can ensure that in addition to holding a token long term, the time spent holding the token can be used to create additional income. A token holder could earn annual percentage yields as high as 8.19% for BTC, 25.12% for dYdX, 6.49% for AAVE, 5.23% for BNB on Binance, and on Coinbase, you can earn 4.5% for ETH, 5% for ATOM, 4.63% for XTZ and 0.45% for XTZ
2. Low barriers to entry
Compared to a proof-of-work mechanism that requires a large amount of computing power and a large amount of energy, the proof of stake system does not require large amounts of energy. According to a report published in September 2021 by Digiconomist, the energy consumed invalidating a single Bitcoin transaction is equivalent to the energy utilized by an ordinary American home for 61.47 days.
3. Environmental Considerations
Staking is believed to be more environmentally sustainable, saving over 99 percent of energy consumption, according to Vitalik Buterin, one of the co-founders of Ethereum. Proof of work mechanisms, on the other hand, requires specialized mining hardware such as a GPU, which consumes a lot of electricity. Each Bitcoin transaction is projected to use around 2100 kilowatt-hours (kWh), roughly equivalent to what an ordinary US home spends in 75 days. Cryptocurrencies like Bitcoin can produce a lot of greenhouse gas emissions if the energy comes from non-renewable sources. Bitcoin's annual carbon footprint is comparable to the discharge of 97.2 megatonnes of carbon dioxide, almost equal to Argentina's yearly emissions.
How can you stake?
If you decide to stake your tokens, you can either be a validator on a proof of stake platform or stake your tokens on an exchange.
1. Purchase a proof-of-stake coin
Staking is not available in all cryptocurrencies.. You will need a cryptocurrency that uses proof of stake to validate transactions. For example, Ethereum (ETH) was the first cryptocurrency to have a programmable blockchain on which developers could build apps, other examples of proof of stake cryptocurrencies are: BNB, Tezos, Decentral Games (DG) etc. Ethereum began as a proof-of-work system, but it is now shifting to a proof-of-stake paradigm.
2. Stake your token on an exchange
There are a number of exchanges where you could stake your token, for example Binance is one of the top crypto staking platforms for individuals who want to earn high staking rewards. This well-known exchange platform can accommodate approximately 100 distinct staking coins, allowing for a diverse selection of projects and APYs. You could also stake your token on the following exchanges: Coinbase, eToro, Crypto.com, LooksRare and many more exchanges; however, it is important to do your research on an exchange before staking your tokens.
3. Buy the Interest Compounding ETH Index (icETH)
If you are looking for a simple way to access enhanced yield, without having to personally stake your assets, you might consider the Index Coop’s icETH product. icETH uses a leveraged liquid staking approach built on the Set Protocol. Within Aave v2, icETH uses Lido's liquid staked Ethereum token—stETH—as collateral and borrows ETH in a recursive manner to obtain more stETH. As a result, token holders get spot exposure to ETH and approximately twice the yield when compared to holding stETH alone.
This product is quite advanced when compared to basic staking processes, so make sure you have a thorough understanding of how it works before proceeding.
About Index Coop
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
How to buy Index Coop products:
- First, you’ll need to create an Ethereum wallet like Argent, Metamask, Gemini, or Rainbow.
- Next, you’ll set up your new wallet and connect your bank account
- Once you’ve deposited fiat currency in your wallet you can exchange it for ETH and purchase Index Coop products like the Interest-compounding ETH Index (icETH)
You can also earn or buy icETH tokens directly via your favorite decentralized exchange.
Disclaimer: This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
You shall not purchase or otherwise acquire our restricted token products if you are: a citizen, resident (tax or otherwise), and/or green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (defined as a U.S. person), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized (together with U.S. persons, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized).
